Beyond Compliance: Creating Sustainability Goals That Make a Difference

While many organizations have included sustainability and environmental, social, and governance (ESG) practices into their value systems for years, in today’s global economy, it’s becoming more than just a feel-good initiative—it’s a mandate coming from employees, investors, and stakeholders. Soon, the federal government may also be of influence on the matter, as it considers requiring companies to report their climate-related disclosures. This October, the United States Securities and Exchange Commission (SEC) is expected to act on its proposal to bring forward standardized criteria for climate-related disclosures. Specifically, the SEC could potentially require public companies to disclose details on carbon emissions, climate-related risks, targets and goals, and related governance.

Reporting standards are also beginning to unfold around the world. Most recently, the European Commission adopted the European Sustainability Reporting Standard for companies meeting the applicable criteria, and the International Sustainability Standards Board issued new standards featuring a global baseline for reporting requirements.

These ESG frameworks help companies measure their financial and non-financial performance, including “sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.” When companies are said to be operating sustainably, it generally means they’re working to strike a balance between generating profits and promoting social and environmental well-being.

While these frameworks and regulatory efforts are a positive step forward on the sustainability front, they haven’t necessarily translated to lasting change just yet. The May-June 2021 Harvard Business Review article, “Overselling Sustainability Reporting,” called out that increases in ESG reporting haven’t had much of an impact on curbing carbon emissions.

Today, however, there’s more precedent to drive change. To actually succeed and make lasting progress, organizations need to find the balance between what’s being required of them by their stakeholders and what their ESG strategies can actually do to support their long-term business goals. Here, ESG experts offer insight into how organizations can create lasting ESG strategies that truly make an impact on the world—and their businesses.

Setting an Example for Others

Although mandatory climate-related reporting hasn’t yet come to fruition in the U.S., many organizations have voluntarily established ESG strategies for their stakeholders and clients.

One of them is Grant Thornton LLP (GT), one of America’s largest audit, tax, and advisory firms, who’s been weaving strategies around ESG into their business practices for over two decades.

“ESG is really at the core of what we do,” says Elizabeth Sloan, CPA, GT’s managing director of ESG and sustainability services. “Every program we offer is built around how we’re keeping our people and stakeholders engaged and safe, so that we can retain them—people are our business.”

One area of new focus for entities is developing a well-defined environmental strategy for evaluating their carbon footprints. An activity most organizations can alter to make a positive environmental impact is business travel.

For instance, organizations could develop travel policies with measurable data points for reducing their carbon emissions. The reality is, environmental stewardship has become a significant cost containment measure for organizations, which enables them to invest more into other areas, like people, technology, and innovation.

Bridging the Gap From Voluntary to Mandatory

While organizations of all sizes have been incorporating ESG values into their operations and reporting on a voluntary basis, the business climate is shifting it from a values-based goal to a business imperative.

Increasingly, professional service firm clients are asking what firms are doing to be environmental stewards. At the same time, both current and prospective employees are keen to examine firms’ commitments to the environment and other values.

In particular, millennials and younger populations are values-oriented and care deeply about ESG. Firms looking to attract and retain the best talent, and the best clients, need to meet people where they are and ensure what they’re doing is aligned with their individual beliefs.

While awaiting the SEC’s final actions, organizations trying to get a head start have been facing some headwinds over how to align their voluntary ESG goals with standardized sustainability reporting guidelines.

Currently, those who are already generating internal reports are creating their own processes and publishing their data on their websites and in investor questionnaires, proxy statements, sustainability reports, annual reports, and other places. Of course, the challenges for them will come when it’s time to gather their data and report it in the format the SEC eventually requires.

Impact on Smaller Private Companies

While the proposed SEC requirements are directed at public companies, the new climate reporting standards may also impact private organizations that do business with them if the standards flow downstream.

Some ESG experts say the prospects of future reporting requirements are already causing a ripple effect, and suppliers should anticipate needing to have ESG strategies in place and be ready to provide their environmental data to satisfy their publicly traded clients’ reporting requirements.

Sloan encourages companies to cast a wide net, analyze their entire stakeholder community, and devise strategies for determining how to respond to requests for data related to their environmental practices, including requests from their suppliers.

“We advise larger companies to think broadly in terms of their full supply chain, including their suppliers and customers, the end consumer of their products, the community’s perception of their organization, and who they do business with,” Sloan says.

Even for organizations that won’t fall under the SEC’s reporting requirements, adopting ESG programs and voluntary reporting is simply a good business practice moving forward.

Matt Pelton, senior director at Riveron, a national business advisory firm in Chicago, is responsible for assisting clients with ESG strategy and reporting. He says the companies that act on ESG initiatives will differentiate themselves from their competitors.

“Gathering data from activities like cutting carbon emissions, donating volunteer hours, and activating transparency around governance will put power behind their performance. This will help them see the pathway to improvement in those areas and show their stakeholders they’re making progress,” he says.

To start, Pelton suggests organizations create a value proposition that includes the ways their values impact the success of their business.

“To demonstrate their progress on ESG initiatives, they can do a materiality assessment that states the things they care about, along with their goals, and design a program that tracks and measures data,” Pelton says. “To simplify the process, identify a few goals to focus on over six to 12 months, set strategies for where you want to be in a year, and from there, build a roadmap to a stronger sustainability strategy and platform.”

Sloan adds that all organizations—small, large, private, and public—can make a strong business case for tracking their sustainability goals, even if they don’t fall under the SEC’s future mandate. Overall, it’ll lead to greater employee loyalty and a stronger organization.

“When we looked at our business internally, we realized our employees really wanted to work for a firm that has a strong purpose they feel connected to and rooted in,” Sloan says. “This also helps with our employee retention, and it absolutely matters to our clients as well.”

Building Sustainability Reporting Expertise

As sustainability reporting evolves, the process is making its way to finance departments where it’s viewed as a natural fit for accounting professionals who already have the skill sets to report data that’s complete, accurate, and delivered in a timely way, Sloan stresses.

“The knowledge and skills that CPAs possess will be important as ESG reporting requirements increase—and they’ll be widely valued as firms work to get this data in place,” she adds.

Notably, these new reporting standards could require compiling data and building reports from information accountants likely have never gathered before. Therefore, some organizations are considering upskilling employees and building new teams specifically to tackle ESG reporting, which will take time to develop.

Professional services firms, like GT and Riveron, are already helping their clients get ready for more robust ESG reporting. However, whether hiring for ESG expertise, upskilling employees, or reaching out to consultants or auditors for help, Pelton predicts that filling the void will be challenging for organizations.

“Once the SEC rules for reporting are in place, there will be a big educational and recruiting effort,” he predicts. “Firms will be seeking and cultivating talent with deep climate expertise, and without a wealth of professionals who have experience working in sustainability, we’ll have to start thinking about ways to create interdisciplinary trainings to prepare people for mandatory reporting.”

Pelton forecasts that some organizations are likely to take an interdisciplinary approach by forming in-house consultancies with various corporate professionals that can bring their own expertise to the table. For example, a company’s chief financial officer might be able to think about ESG reporting in terms of how to create business value, and their general counsel might review disclosures that go to stakeholders and investors and think of ways to mitigate risk with the information that goes out into the marketplace. Additionally, the accounting team can focus on creating confidence in the audit rating data as well as internal auditing and controls.

Despite the challenges that may lie ahead as the SEC prepares to put its reporting requirements in place, those that put ESG into their value proposition and think through how it makes sense for them as an organization are going to be the most successful.

One place to start is by examining the policies and procedures that are already in place. Sloan says this process may show that the basic, sound, cost-cutting measures that have always seemed like common sense actually fall under the social responsibility umbrella.

“Some organizations already have ESG practices woven into their day-to-day practices but might not even think about them in those terms,” she says.

With the learning curve and the additional workload the SEC reporting requirements will likely bring to the table, setting goals and tracking data now makes good business sense. In addition to complying with reporting mandates, sustainability reports will be useful in making business decisions and ensuring that every initiative is linked to value.

“Overall, your ESG strategy will be most effective if it integrates into your overall organizational strategy,” Sloan says. “Rather than considering it as just one more thing you’re required to report on, view ESG initiatives and sustainability reporting as a way to create a stronger, more profitable company.”

Related Content:

• ESG: A Roadmap to Value Creation: With continually evolving frameworks and numerous data points to navigate, the road to incorporating an effective ESG strategy into any business model is a foggy one. But a carefully charted roadmap can reveal a clear path to long-term value creation. Here’s what today’s accounting and finance professionals need to consider if they want to drive their organizations toward sustainability and success.
• 5 Steps for Establishing ESG Reporting Processes: Corporate finance professionals are increasingly being called on to lead companies’ ESG reporting processes. Here’s how to get it right.